Waterdrop splashes back to revenue growth. But are investors listening?

The insurance broker’s revenue rose 38.4% in the third quarter, boosted by a 20-fold increase for its young technical services business

Key Takeaways:

• Waterdrop looks set to return to strong revenue growth this year, ending three consecutive years of declines
• The company’s new technical services segment is recording explosive growth, going from nearly nil last year to supplying 23% of its revenue in the third quarter

By Doug Young

The old adage “If a tree falls in the forest but no one hears it, does it make any sound?” seems to summarize the case with the latest financial results from insurance broker Waterdrop Inc. (WDH.US). Despite posting some very impressive growth in a difficult operating environment, the company’s shares barely budged in the next two trading days after the results announcement, rising slightly on Wednesday, only to give back the gains and a little more the next day.

In Waterdrop’s case, another adage, “If you can’t stand the heat, get out of the kitchen,” also seems to apply. The insurance brokerage business that provides the bulk of the company’s revenue is getting increasingly tough, as China rolls out a steady stream of new regulations limiting the profits companies can make from that middleman business.

In response, Waterdrop has been turning to providing services to insurance companies to help them run their business more efficiently. That business looks far more lucrative and is likely to receive state support – or at least less government interference – since most insurance companies in China are state owned. Many of those insurers are currently struggling due to a slowing economy, which may partly explain why China is taking steps to shore up their business by limiting the fees that insurance middlemen like Waterdrop can collect.

Waterdrop, which deals mostly in health insurance, is also using its extensive databases to help drug companies identify patients for their clinical trials, another area that looks unlikely to be affected by government oversight. And last but not least, the company is using AI to improve things like its insurance underwriting, risk analysis and customer service, “allowing us to gain profound insights of our users within milliseconds,” said Chairman Shen Peng.

“In the third quarter, AI served as the core driver for enhancing business quality and efficiency, propelling the company to achieve double-digit high growth in both revenue and profit,” said Shen. “Looking ahead, we will capitalize on technological opportunities by deepening AI integration and driving innovation across our business ecosystem, thereby fueling sustainable growth.”

Perhaps investors have tired of all the recent AI hype in company financial reports, which might explain why they largely overlooked Waterdrop’s impressive results. The company’s revenue rose 38.4% year-on-year during the quarter to 974.9 million yuan ($138 million) from 704.1 million yuan a year earlier. To put that in perspective, Zhongan (6060.HK), a leading private insurer, reported flat revenue in the first half of this year; while Shouhui (2621.HK), another private insurance broker, reported its revenue fell 21% for the six-month period.

Waterdrop was no stranger to falling revenue either. Its revenue was dropping steadily since 2021, falling from 3.2 billion yuan that year to 2.8 billion yuan in 2024. But it looks almost certain to return to growth this year. With the strong third-quarter performance, the company has generated 2.57 billion yuan in the first nine months of this year, up 24% from 2.08 billion yuan a year earlier.

New growth engine in technical services

Waterdrop has two major revenue segments, its core insurance business, and its smaller crowd-funding business, which helps people without formal insurance policies pay for expensive medical treatments. The insurance business is the company’s main revenue source, generating 869.7 million yuan in the third quarter, up 44.8% year-on-year from 600.7 million a year earlier, accounting for nearly 90% of total revenue.

The company’s core insurance brokerage revenue rose 14% year-on-year during the quarter, with first-year premiums from that business up 32.3% from the previous quarter. The company attributed the improvement to upgrades to its data infrastructure and real-time customer evaluation capabilities, which improved the efficiency of its underwriting.

But the star of the show, as we previously mentioned, was technical services, which includes tools to help insurers run their businesses more efficiently by improving areas like risk assessment, customer relations management and complaint management. Revenue from that part of the insurance business rose nearly 20-fold to 196.4 million yuan in the third quarter from just 10.2 million yuan a year earlier, now accounting for 22.6% of the company’s total.

Another potential rising star is the company’s segment helping drug companies identify patients for clinical trials, which it calls digital clinical trial solutions. That segment posted revenue of 31.9 million yuan in the latest quarter, up 31% year-on-year, showing it could become a new growth engine by serving China’s increasingly crowded field of drug developers in need of patients for their clinical trials.

Waterdrop’s crowdfunding services is quite large in terms of scale. But it doesn’t generate a huge amount of revenue for the company, probably at least partly due to the bad optics that would result if it were to make big profits from a business targeted at suffering people, many of them low income. The crowdfunding business generated a modest 65.7 million yuan in revenue in the third quarter, basically flat from 65.8 million yuan a year earlier.

Waterdrop’s operating costs and expenses rose by 27.1% during the quarter, quite a bit slower than its revenue growth, helping to fuel a 330% rise in its operating profit to 113.8 million yuan for the period. Its net profit also rose by a healthy 60% year-on-year for the quarter to 158.5 million yuan, representing its 15^th consecutive quarterly profit.

While response to the latest report was muted, investors haven’t exactly ignored Waterdrop’s improving outlook. The stock is up 54% this year, though many other Chinese tech stocks have recorded similar gains. Its current price-to-sales (P/S) ratio stands at 1.52, which is well ahead of the 0.64 for Shouhui and 0.59 for Zhongan, showing investors prefer the stock for its lower exposure to regulatory risk and China’s slowing economy.

Waterdrop could be partly suffering from an image problem, as many investors still see the company as a broker operating in a difficult insurance market. But if it can shift that image to a high-growth provider of tech-based services for insurance companies, and also keep boosting its work with drug companies, its stock could find some potential upside.

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